"There is a rumor the mainland will impose a capital-gains tax, so the market crashed," said Francis Lun, general manager of Fulbright securities in Hong Kong.

But analysts said such a tax was unlikely, with mainland authorities instead likely to monitor the effect of their recent move to increase levies on share trading. In a surprise move Wednesday, the Ministry of Finance lifted the tariff on stock transactions to 0.3% from 0.1%.

Hong Kong and China stay in focus

"People seem to be following Shanghai and Shenzhen a lot more closely than they are following U.S. markets at the moment," said Andrew Clarke, a sales trader with Societe General in Hong Kong.

"Hong Kong has a lot further to go and I think China has a lot further to go as well; whether it does it immediately, as in the summer months, or whether it does it in the last quarter, remains to be seen."

'Accelerated monetary tightening measures should be expected over the next six months as Beijing fights to regain control of its overheating economy.'
Jim Walker, CLSA

China Life Insurance Ltd. (2628)
LFC, -0.42%
paced gains in the insurance industry after a senior Chinese official said Thursday new reforms will soon enable China's insurance companies to invest in overseas stocks beyond Hong Kong.

Shares of China Life were up 2.3% while Ping An Insurance (2318) added 4% and PICC Property and Casualty Ltd. (2328) climbed 2.1%.

A measure of Chinese manufacturing operating conditions showed that activity in May reached its highest level in more than two years, owing to new orders and strong employment conditions. The CLSA China Purchasing Managers' Index, which measures nationwide manufacturing activity, rose to 54.1 in May from 53.3 a month earlier.

"Accelerated monetary tightening measures should be expected over the next six months as Beijing fights to regain control of its overheating economy," said CLSA Chief Economist Jim Walker in a research note.

"There has been a gradual pick up in export price rises over the last six months.... The implications for global monetary policy are none too positive: the age of disinflation being exported from China looks to be well and truly over."

Miners, motor cars and more

Top miner BHP Billiton
BHP, -1.39%
(BHP) led gains in the resource sector after industrial metals prices rose overnight. London copper prices hit their highest levels in more than a week, while lead set a record high for the fourth session in a row.

Among top electronics movers, Samsung Electronics rose 3.9%, pacing gains in spot prices for dynamic random access memory. Those gains fuelled hopes that prices in the technology sector may have bottomed.

In the broader market, South Korea's Kospi index rose 2% to a record 1,716.24.

Back in Tokyo, shares of Toyota Motor Corp. (7203)
TM, +0.02%
gained 2.2% and Elpida Memory (6665) added 5.8%. Both are major exporters.

Shares of exporters typically strengthen when the yen falls. A weaker yen makes Japanese goods cheaper in other markets and also raises the value of income earned overseas when repatriated into yen.

In currency trading, the dollar was trading at 121.95 yen as compared with 121.70 yen late Thursday in New York.

Shares of Mitsubishi Heavy (7011) were up 1.6% after reports British aerospace group BAE Systems Plc (BA) has entered talks with the Japanese industrial group to license the manufacturing of the Eurofighter jet, if Japan elects to purchase the aircraft.

In Japan's financial sector, shares of consumer lender Aiful Corp. (8515) slipped 4.7%. The company said it would reduce the maximum rate it charges on consumer loans before new government rules take effect in the sector.

Elsewhere around the region, Singapore's Straits Times Index hit a record 3,570.10 before easing back slightly to 3,548.32, which was a 1.1% gain. New Zealand's NZX-50 Index was down 0.1% at 4,296.43. Taiwan's Weighted Price Index added 1.3% and Malaysia's KLSE gained 1%.

Markets in Indonesia were closed for a public holiday. In late trading, India's Bombay Sensex index was up 0.2% and Thailand's SET closed 2.2% higher.

In after hours trading, crude oil for July delivery was up 23 cents to $64.24 a barrel. In U.S. trading Thursday, markets closed mixed.

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